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For quite a few years after Service tax made its entry in 1994, it was assumed that export of services would not be taxable so long as the proceeds were received in convertible foreign exchange. Years 2005 and 2006 saw the Government tax Import of Services on the reverse charge mechanism and zero-rate export of services if certain specified criteria were met.
As Service tax credit was merged with the Cenvat Credit scheme by then, 100% export oriented entities quizzed the Government on the fate of the tax they paid on their input services. Willy-nilly, the Government responded that it could be set-off against other export services failing which it would be refunded. As overjoyed exporters kept filing their refund claims, the Department attempted to outsmart them by getting extremely finicky on the input services that were eligible for refund. Arbitrary disallowances culminated in an amendment to Rule 2 of the Cenvat Credit Rules in 2011 which has succeeded in complicating the complication. Due to the arbitrary disallowances of input tax credit, some entities file their refund claims and do not take the trouble of appearing for the hearing by filing a letter asking that the refund claim be disposed on merits.
Draft Circular
Notification No 17/2009 detailed the procedure to be followed to obtain a service tax refund. Draft Service Tax Circular F.No.354/66/2011-TRU dated August 12, 2011 attempts to simplify the mechanism for obtaining refunds under Service tax. The Circular plans to provide a refund through the Indian Customs EDI System (ICES) similar to the Duty drawback payouts. Under the proposed scheme, an exporter, who opts for claiming refund through the ICES in relation to specified services used for export of goods, would declare his intent on the shipping bill which will be processed on the same lines as drawback shipping bills.
In the case of non-drawback shipping bills, the bills will, after filing of Export General Manifest (EGM), move separately, get processed and sanctioned on the ICES. In either case, shipping bill itself will be the basis for claiming refund. There are plans for creation of separate service tax directory in the ICES for the specified services in terms of Notification 17/2009-ST, dated 07.07.2009 along with the specified rate for each of these services. These rates would be similar to an AIR (All Industry Rate) which is being proposed for these services. If an exporter wants a refund on the basis of actual input taxes paid, the ICES route cannot be used and filing through field formations would have to be resorted to. If the non-ICES route is chosen, the exporter has to mention service tax serial number 9801 in the shipping bill. Exporters would not have an option to choose between an AIR rate and a full-blown rate subject to disallowances made by the Assessing Officer.
Hazy provisions
Although the Circular states there are significant differences between a drawback claim and a service tax refund, it ends up detailing only one difference which pertains to a procedure called scrolling. In a very complex manner, it states that scrolling for both drawback and service tax will occur together in the case of drawback claims. For non-drawback claims, the service tax refund is scrolled once the EGM is filed. This procedure could be just another day in the office for entities used to filing drawback claims, but new entities could be stumped with the scrolling procedure. They would also find the instruction “Chapter/Sub heading number of the schedule of STR at the first 2 digit or 4 digits, as the case may be, should tally with RITC code” confusing. Illustrative examples with these instructions would have provided clarity.
Pros and Cons
The scheme would assist in faster refunds and could also eliminate red-tapism in the issue of refunds. Since the AIR rate is generally expected to be lower than the service tax rate, the amount of refund could also be lower. Export undertakings would await further clarifications on the Cenvat Credit Scheme before opting for this Scheme since they would like to weigh the pros and cons of higher refunds vis-a-vis faster refunds.
(The author is a Bangalore-based chartered accountant.)
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